Lord Mandelson has said Britain would be "stark staring bonkers" if it turned its back on the European Union.

The former Labour minister said it made no sense to exit a market on Britain's doorstop and a move in that direction would erode the country's ability to trade with others.

"India would laugh in our faces" if Britain tried to negotiate a free trade agreement outside Europe, he told delegates at the British Chambers of Commerce (BCC)annual conference in London. "They would walk away and leave us whistling in the wind."

The shadow chancellor, Ed Balls, told the conference earlier that to walk away from EU membership would be "reckless, foolish and deeply damaging. It would be anti-investment, anti-jobs and anti-business."

He said the Conservative pledge to hold a referendum on the subject was putting party politics before the national economic interest and creating huge uncertainty for business.

"There is no future for Britain in walking away from our biggest market," Balls said. "We believe Britain is better placed to shape Europe's future, and back British business, jobs and our national interest, if we are fully engaged rather than having one foot out of the door."

Mandelson made further remarks on the importance of taking the initiative on EU energy prices and suppliers.

"Why do we pay more than we should or need to for our energy supplies from outside Europe? The reason is that our suppliers – Russia and its gas supplier Gazprom in particular – play divide and rule among us.

We're not united in Europe when it comes to energy. We need a single European energy market and we need a single purchasing agreement that enables us to turn the tables on our suppliers, assert our consumer and customer strength and stop these people calling the shots so that we can get our energy prices down.

"That is an illustration of where each and every business and consumer will be better off if we were able to use our vast market power against those who at the present time are playing divide and rule among us. It's an illustration of why our economic interests lie in Europe. You think we would have the strength, the power in a market on our own in Britain to stand up to the Gazproms and the Algerians and the others of this world and start dictating prices to them? No, you need market power in order to do that. That's what we get in Europe."

The BCC's director general, John Longworth, said uncertainty over the EU, as well as over Scottish independence, was already hurting investment and holding back UK exports.

He added that the government had so far failed in its bid to rebalance the economy and put the UK on a path to victory in the global race to achieve more exports.

The chancellor George Osborne set a target in 2012 of doubling UK exports to £1tn by 2020. This would require a 10% increase in exports every year, according to Longworth.

"In 2012 as a nation we only managed 1.9% growth in goods exports, and only 0.6% in 2013. So far the national plan has failed," he said.

Longworth also warned the UK's relationship with Scotland will be irrevocably changed whatever the outcome of the vote on independence.

"Scotland's choice is a very big deal. Will a yes vote be disruptive? You bet it will. Will a no vote still lead to a fundamental shift in the political and financial settlement? You bet it will.

"Regardless of how Scotland votes on 18 September, things will never be quite the same again."

Longworth said Osborne had "pulled off a brilliant Houdini-like trick" by talking tough on deficit reduction without losing the confidence of global markets or triggering the social strife of the 1980s.

He warned, however, that much of the pain was to come, with those departments whose spending was not ringfenced – including business, the home office, and welfare – facing further cuts of more than 30%.

"In our global race to create great, sustainable growth, Britain is barely off the starting blocks. Gross domestic product is not yet back to pre-recession levels and we lag behind competitor countries."